Great Lakes Dredge & Dock Corporation
) gained as much as 2.6% and eventually closed at $7.48 on Aug 22,
after Moody's Investors Service - the rating unit of Moody's
) - upgraded its outlook to positive from stable.
The upgrade mainly reflects Great Lakes Dredge & Dock's
continued improvement in operating performance and financial
leverage. A consistent focus on core dredging and environmental
remediation businesses after the sale of its demolition business
led to strong operating growth.
In Apr 2014, Great Lakes Dredge & Dock completed sale of the
demolition business that was previously part of the environmental
& remediation segment, for $5.3 million. The demolition
business, which contributed 10-15% of revenues in fourth-quarter
2013, recorded loss due to internal control weaknesses and
reporting issues. The sale will likely expand services of the
company's environmental & remediation segment.
The rating also reflects expectations of a moderate improvement in
earnings before interest, taxes, depreciation and amortization
(EBITDA) margins, given the strong backlog and bidding activity in
Financial leverage pro forma for sale of the demolition business
has improved to 4.0x debt/EBITDA (on a Moody's adjusted basis) for
the last twelve-month period ended Jun 30, 2014 from nearly 6.0x a
However, Moody's affirmed Great Lakes Dredge & Dock's Corporate
Family Rating (CFR) and Probability of Default Ratings (PDR) at B3
and B3-PD, respectively. The rating affirmation depicts the highly
cyclical and high fixed-cost nature of the dredging industry, high
customer concentration and dependence on government funding
The ratings remained at B3 despite improved credit metrics. This
was owing to risks associated with the company's intention to
increase debt levels to finance the construction of its new $140
million Articulated Tug/Barge (ATB) hopper dredge, which will
expectedly become operational in the second half of 2016.
Additionally, earnings fluctuations from quarter to quarter due to
impact of adverse weather conditions on equipment utilization,
changing funding availability and variation in quarterly backlog
levels were taken into account while assigning the ratings.
Rating on the company's unsecured notes due 2019 were reiterated at
Caa1. The rating agency also verified speculative grade liquidity
rating (SGL) at SGL-3, reflecting an adequate liquidity profile.
However, Moody's remained concerned about free cash flow, which is
expected to be negative due to higher level of capital expenditures
required for constructing the new ATB hopper dredge. Additionally,
working capital swings related to the seasonal nature of the
business and overseas operations contribute to variability in free
cash flow generation.
The ratings anticipate continued usage of the company's
$175-million revolving credit facility to fund working capital
swings and for partially funding construction of the ATB dredge.
Moody's also stated that the ratings could be raised if the company
improves its liquidity position, maintains a healthy backlog and
debt to EBITDA is sustained below 4.5x, inclusive of ATB
dredge-related financing. However, if debt to EBITDA exceeds 6x, it
could pressure ratings.
Great Lakes Dredge & Dock expects strong fleet utilization in
the second half of the year. The company expects most of the
environmental & remediation segment's backlog to be complete in
2014. Moreover, it remains optimistic about increase in bidding
activity, which will add to backlog.
Further, the Water Resources Reform and Development Act is a
catalyst for the domestic dredging industry, which will drive the
company's long-term growth.
However, the company remains concerned about unfavorable weather
and fluctuations in currency exchange rate that could affect
revenues in the future.
Great Lakes Dredge & Dock Corporation is the largest provider
of dredging services and one of the major providers of commercial
and industrial demolition and remediation services in the U.S.,
mainly in the Northeast. The company owns and operates the largest
and most diverse fleet in the U.S. industry, comprising over 200
At present, Great Lakes Dredge & Dock holds a Zacks Rank #4
(Sell). However, some better-ranked stocks in the sector include
Boise Cascade Company (
) and UCP, Inc. (
), both of which have a Zacks Rank #2 (Buy).
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